India Moves to Severely Restrict Use of Cash, Forcing Much of Economy Into Barter

By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends most of her time in India and other parts of Asia researching a book about textile artisans. She also writes regularly about legal, political economy, and regulatory topics for various consulting clients and publications, as well as writes occasional travel pieces for The National.

The biggest story on Indian television yesterday wasn’t the election of Donald Trump. For on Tuesday night (IST), Indian Prime Minister Narendra Modi in a surprise speech declared that currency notes of rupees (Rs) 500 and Rs 1000 — the highest two denominations in circulation– would be invalid as of midnight that same night. The withdrawn notes could no longer be used for transacting business or as a store of value for future usage (with some limited exceptions,  but even these were only allowed for a short transition period).

From Modi’s speech:

“There is a need for a decisive war against the menace of corruption, black money and terrorism… Corruption, black money and terrorism are festering wounds which make the country hollow from within,” he said, adding such activities hold back the nation’s progress.

Describing illegal financial activities as the “biggest blot”, Modi said that despite several steps taken by his government over the last two-and-a-half years, India’s global ranking on corruption had moved only to 76th position from 100th earlier.

“This shows the extent of the web of corruption in the country. The disease of corruption is the domain of some veted people who are flourishing. Some people have misused their positions and benefitted. On the other hand, honest people are suffering,” he said.

The Reserve Bank of India (RBI)– the Indian central bank– as reported by The Times of India, elaborated:

The incidence of fake Indian currency notes in higher denomination has increased. For ordinary persons, the fake notes look similar to genuine notes, even though no security feature has been copied. The fake notes are used for antinational and illegal activities. High denomination notes have been misused by terrorists and for hoarding black money. India remains a cash based economy hence the circulation of Fake Indian Currency Notes continues to be a menace. In order to contain the rising incidence of fake notes and black money, the scheme to withdraw has been introduced.

Chaos Ensues

India remains a cash-based economy, especially for low-value transactions, and the move has caused widespread chaos, as I write this from Kolkata where I am currently visiting. The move was accompanied by a temporary shut down of all banks and ATMs, with banks reopening earlier today and ATMs due to reopen tomorrow.

Initially, after the announcement, the highest denomination legal tender note in circulation was the Rs 100 note. New legally tender Rs 500 and Rs 2000 notes have been made available today, according to Tushar Roy, chief manager of a nationalized bank, Central Bank of India. Not all banks have yet received the new notes, but Roy says that this problem is expected to be resolved soon. The government also expects to re-introduce Rs 1000 notes soon, to include advanced security features. When ATMs open tomorrow,  withdrawals will be limited to a maximum of Rs 2000 per transaction, as compared to the Rs 10,000 and in some cases, Rs 15,000 limits, that previously applied.

Starting today, after producing appropriate identification, people are allowed to exchange old notes for new at any of the 19 RBI offices, any bank branch, or at any head post office or sub-post office. They will have until December 30 to complete their transactions.

Individuals receive full value for the entire volume of bank notes tendered at any of these venues, but here’s the kicker: At the moment, each person is limited to receiving only Rs 4000 per person in cash irrespective of the size of tender. Anything over and above that amount can only be credited to a bank account. This allows the government to track whether the sums tendered have been legitimately acquired. Withdrawals from bank accounts will be limited to Rs 10,000 a day and Rs 20,000 a week. The government has announced this part of the policy may be relaxed in future, says Roy, in order for employers, for example, to meet payrolls currently made in cash. (Ultimately the government wants more transactions to be paid via bank accounts, so that they can be tracked and taxed appropriately).

Does The Policy Make Sense?

It’s beyond the scope of this post to speculate on the impact the new policy will have on individuals of various occupations and with myriad reasons for transacting in large amounts of cash. For more on this point, interested readers might wish to look at this article in The Wire.

Some have criticized the policy for focusing on currency alone, and have noted that black money is typically not held by Indians in stacks of Rs 500 and Rs 1000 notes, but in one of two alternative ways.

The very rich store black assets in offshore accounts (as detailed in, among other sources, the Panama Papers).

But tax evasion and corruption is not limited to the very richest alone. In India, many doctors and other professionals, members of the business community, and small traders also underreport their taxable income. They tend to hold their black assets on-shore, within India, in the form of real estate, art work,  gold bullion, jewellery, or securities.

Unlike other current policy areas– border incursions into Pakistan, for example– the political opposition has has not contested the objective of the Modi move. There is virtually unanimous concurrence– at least publicly– on cracking down on black money. Yet as The Hindu reported, former Finance Minister Palaniappan Chidambaram has criticized the Modi government’s method for achieving its objective:

“We support the objective of the government to stamp out black money. But the method they have adopted raises questions… The move has come as a bolt from the blue for the common man.”

The real test for the government would begin [Thursday], Mr Chidambaram said. “How efficiently and how quickly the money is exchanged…. If there is harassment or inconvenience and all kinds of questions are asked, then I think that will be completely counterproductive.”

A similar move had been contemplated by the previous Congress-led UPA government, he recalled. But the idea was dropped as “the economic gains were not too great.”

Mr. Chidambaram said the introduction of the new series of notes was estimated to cost Rs. 15,000 crores to Rs 20,000 crores [Jerri-Lynn here: a crore is 10,000,000 in the Indian numbering system]. “The economic gains of demonetisation should be at least equal to that amount.”

If the additional tax revenue pulled in by the Modi move is less than that amount, the new policy will actually have ended up costing the government money– rather than increasing government revenues.

As Chidambaram summarized (again from The Hindu article quoted above):

The “economic wisdom” of the government’s decision, Mr Chidambaram said, would be tested on three parameters: a) the present cash to GDP ratio is 12 per cent. Will it come down to the world average of about 4 per cent? b) The value of the high denomination notes currently in circulation is about 15 lakh crore rupees [Jerri-Lynn here: a lakh is 100,000, a crore, 10,000,000, so a lakh crore is 1,000,000,000,000.] Will that value come down significantly? c) Will gold imports surge, indicating that unaccounted income/ wealth is seeking refuge in bullion and gold jewellery?

Various economists have also presented other criticisms of the government’s move, as reported by The Wire. Requiring a switch to new bank notes means Indians must take time to switch their existing Rs 500 and Rs 1000 notes into the new bank notes. If new notes are not freely and widely available, this will freeze trade and the normal functioning of an exchange economy. Further, many Indians receive salaries in cash and do not have bank accounts at present, so requiring transactions to pass through the banking system will cause them considerable immediate inconvenience.

Impact on Economic Activity

But there is a wider reason for critiquing the policy. “Black money and not paying taxes: These are bad things in a society,” says Suvojit Bagchi, Kolkata bureau chief for The Hindu. “Not surprisingly, everyone– including the opposition– agrees on the objective of cracking down on black money.” Increasing the tax base- is the prime objective here. But  will the demonetization policy produce substantial tax revenue?  Bagchi noted that Chidambaram questioned whether taxes raised would be sufficient to recoup  the cost of printing new bank notes.

Another objective, Bagchi added, is to move India away from its reliance on cash, toward a more American or European plastic system, where it’s easier to track– and tax– money.

And finally, at least half of Indian economic activity occurs in the informal sector, which is not tightly controlled. Bagchi gave the example of a building promoter, whose building activity produces both black and white revenues. Indeed, perhaps 40% of the promoter’s overall activity, he estimated, might be black activity. But that black activity also generates employment, as well as other knock on effects. While the government hopes that its policy will increase the tax base, it’s also possible that demonetization might instead lead to the shut down of at least some black activity. “So, the government’s latest move may actually slow economic activity considerably,” Bagchi says, “But for how long, and to what extent, no one knows.”

He further added, “At the moment, the Indian economy is somewhat insulated from the world economy, in part due to its reliance on cash and the existence of considerable black activity. Once India moves to a plastic system, and cuts back on that black activity, it will lose some of this insulation.”

As reported in The Wire, Abhijit Sen, former member of the Planning Commission, is also concerned about contraction in the informal sector:

The sudden decision to demonetise currency notes of Rs 500 and Rs 1,000 is targeted to reduce illicit stocks of black money and fake currency. This has a clear rationale if such notes are used mainly to stock undisclosed wealth, rather than for transactions. However, RBI data show that currency notes of these two denominations make up over 80% of the total currency in circulation. Therefore, unless a very large proportion of money in circulation lies permanently as stocks, the demonetisation can also be expected to have a significant immediate effect on that part of the economy which relies mainly on cash transactions.

The size of India’s cash economy is not exactly known but, given the large proportion of workers in informal sectors, it is unlikely to be less than half the total economy. We can, therefore, expect an immediate contraction of this part of the economy in the next two days and with the effect stretching over a longer period of time, although diminishing over time. Whatever its long-term positive effects, those depending on cash whether for daily wages or as payments for goods or services they sell are likely to be in for tough times in the coming days. In the long term as well, all that this does is partially eliminate some black money stocks without undoing the processes that lead to black money creation.

 

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49 comments

  1. kj1313

    As an Indian American you’re spot on that there are other ways to stash money. Now if Modi banned gold and gold jewelry it might be taken more seriously, but then there would be a massive riots by everyone.

    1. BecauseTradition

      Except gold is not money. Fiat is what is needed to pay taxes; nothing else is acceptable. And since failure to pay taxes can have dire consequences, inexpensive fiat easily trumps gold at tax time.

      1. Oregoncharles

        Does failure to pay taxes have “dire consequences” in India?
        With that large a cash economy, I doubt it.

        1. BecauseTradition

          You raise an important point: Taxes should be unavoidable* if we are to have equal protection under the law.

          *E.g. land taxes

      2. CraaaaaaaazyChris

        Gold doesn’t need to be ‘money’. It just has to function as a store of value, which it apparently has been doing in India. JLS mentioned other store of value assets: real estate, fine art, financial securities. But I suspect gold jewelry or coins is by far the most available and practical to the average person there in India. And when you need fiat money – for taxes or whatever – go back to the gold shop and convert gold to fiat.

        I wonder if the gold buying/selling is taxed…. kj1313 says people would riot if they banned it. they should tax it, not ban it (IMHO).

        1. BecauseTradition

          And when you need fiat money – for taxes or whatever – go back to the gold shop and convert gold to fiat.

          You mean sell gold for fiat – at whatever price you can get if your need to pay taxes is urgent enough. Thus fiat trumps gold – at least where taxation can be enforced.

  2. Teddy

    Terrifying. Not only is cash suddenly exchanged, but apparently there will be permanent limits to how much can be withdrawn from bank accounts at a time, in effect ‘trapping’ people’s money in the financial system. It wouldn’t be surprising if foreign currencies started to supplant the rupee in India’s economy, just as in Eastern Bloc states of yesterday. I really hope this blueprint for financial repression doesn’t spread, but I’m pessimistic – similar idea was floated stateside already during Reagan administration (as weapon against drug trafficking) and in current paranoid atmosphere it might catch on.

    1. BecauseTradition

      in effect ‘trapping’ people’s money in the financial system. Teddy

      Think of the bright side – it will be more obvious than ever that the poor, the least so-called creditworthy, are forced to lend (a deposit is legally a loan) to depository institutions to lower their (the banks’) borrowing costs and, by extension, the borrowing costs of the rich, the most so-called creditworthy.

  3. Bugs Bunny

    This seems incredibly reckless. I spend at least a month a year in India and small shopkeepers and restaurants depend completely on cash. In the countryside, there is no alternative. The upper class will not be affected since they already moved to plastic and apps for payment.

  4. RabidGandhi

    Since it comes from Modi, I’m suspicious from the outset, and on top of that whenever I hear a rightwing business-friendly government talk about eliminating corruption, all kinds of alarm bells go off.

    Nevertheless, I do have one question: In my country, the reason employers keep employees in black is to evade health and safety requirements, to skirt wage laws and to avoid having to pay unemployment benefits (in addition to the workers in black not being covered under collective bargaining agreements– thanks big unions!). Why would forcing employers, as it were, to only have employees in white be bad? Is the idea that the building promoter in the example would take her capital away and not hire anyone because of mean government regulations? If so, I don’t buy that lame rightwing talking point.

  5. Synoia

    black money

    Isn’t that very racist? Should it not be illegal earnings or illegal wealth?

    IMHO the Indian caste system is the most racist system on Earth.

    1. Oregoncharles

      Yes, it is, and indeed correlates with skin tone.

      Nonetheless, “black money” isn’t actually racist; it means “hidden” or “secret” and refers to a diurnal animal’s dislike for darkness. Unfortunately, that coincides with who the underclasses are, both in the US and internationally. However, humans have demonstrated the ability to slaughter people who look just like them over minuscule differences – for instance, the church they don’t go to (former Yugoslavia). The English treatment of the Irish and Scots not very long ago is another example.

  6. Russell

    In the first place I want to determine here what is most ethical, & have that done, regardless of the cost to the Government of the People of India, & especially the working classes trapped in the less desirable position.
    It is right then that the nation dependent on cash would wipe out counterfeiting, especially that of foreign agents. That is Defense, a national Defense issue.
    Defense & Education here must move hand in hand, as I have heard the Indian Police used to, or may still do.
    So the least disruptive thing making pain for the poor, would be to have the neighborhood leaders where the poor do business organize exchange of good faith notes in the hands of the poor for new notes, first.
    It would be likely that the very poor & the very rich would have the dirtiest money.
    For the professional classes I am not familiar enough with the tribes influences upon them, to say. I do believe that most people love their country. The Indian people have every right to be proud of their own Democracy.
    If their Banks Are to Be Industrial Service Banks that exist for the benefits of all, and not the Financial Terrorists of the US & London System, now allied with Putin Cronies, it would be a great time to create a System of Finance, that accomplishes that.
    Pick an Order of Operation, designate the Institution to do the job, Make individuals in the Institutions responsible, & move in a Patient & wise way that conforms to the culture of the people.
    This is what I would recommend from afar.
    All other things I know of the Indian culture is that it has a lot of arms that sometimes seem to flail in new directions all at once.
    A little cash that goes further makes for a happier people overall. If the new cash is of greater value to the people in hand, all will be better than if the new cash is worth less to them.

  7. ptup

    That’s interesting, but, should be lower on the priority list than non toxic air everywhere, paved roads, and a tolerable amount of working toilets, if he wants to join the developed world.

  8. rjs

    a bit of frustration understanig the first part of this until i checked..
    1 Indian rupee = 0.01492 US dollars

    1. Jerri-Lynn Scofield Post author

      Sorry that was the case– I should perhaps have included a conversion in the text itself, to make this topic more accessible to readers who don’t necessarily know the current value of the rupee.

  9. Oregoncharles

    Thank you, Jerri-Lynn. We were hoping you could fill in an important gap in NC’s coverage – not that the site can do everything.

  10. Paul Art

    In India both the two major parties (BJP and Congress) are neoliberal. After almost 50 years of being socialist in ideals, Congress got the neoliberal fever in the early 1990s . The dollar was 16 rupees then. After implementing all the neoliberal hocus pocus reforms recommended by the IMF, labor reform, conducting fire sales of public sector firms, laying waste strong unions, etc etc and 26 years later the dollar is now 67 rupees. Amazing how neoliberal reforms have worked in India. The country has very little to show in terms of innovation in the private sector save all the foreign multinationals that sell all sorts of products there and doing all sorts of outsourcing work there. There are also what are called the ‘body shoppers’. These are the H1-B body shippers to the USA and who are behemoths having grown very fat and very happy feeding on the carcass of the American middle class which once had those very same jobs. These are the Tata Consultancy Services, Infosys, Wipro and several other smaller players. Accenture also has caught up in this H1-B business of late. If you look at internally or intrinsically what they have done to generate jobs by themselves without the aid of these multinationals or outsourcing, it is a big zero. Ironically it is the public sector Indian Space Research Organization that has made leaps and bounds and launched satellites at 1/100th the cost of countries like USA and France. Like China, India shows progress by stealing from the mouths of Americans. It is a zero sum game. It is a little silly that Modi is pulling this currency invalidation stunt. It has already been tried more than once in India in the 1980s with almost zero effect. One major criticism of this is, while the Government is invalidating these currency denominations, it is simultaneously issuing currencies of even higher denominations. So people with black money can now change their currency and stash it in the higher denominations. It is all pure applesauce. Indians are a very clever people but unfortunately there are too many mouths to feed in India and not being self-sufficient in growing its own food or pumping its own oil/energy it needs to pay through its nose to keep the population from revolting. This was the problem for ALL Prime Ministers in India starting with the great Jawaharlal Nehru and his famous daughter Indira Gandhi. India is a very good example of what a great millstone around the neck of a nation population size can be.

    1. Bugs Bunny

      This is a very astute comment, thank you. And especially for mentioning the outsourcing companies — you can include IBM in there as well.

  11. Disturbed Voter

    I wish the Indians luck in defeating the Rothschilds and their ilk. An indirect Raj is … a Raj.

  12. H. Alexander Ivey

    Ah yes. Nothing like a bad social experiment being conducted under an economic guise. The Indian Brahmans (their 1%ers) have no concern about those below them. To give some idea to CONUS Americans of the impact, try going for one week paying for things with only $1, $5, & $10 dollar bills. No twenties, not hundreds. I should make you do without your credit card and checks for mundane purchases but you don’t want to go that far. Even that limited of an experience may be more than you expect.

    FYI, 1,000 Indian Rupees is about 15 American dollars. Yes, yes. Their cost of living is a lot lower than America’s but still, their highest bill is such a small amount, that to suggest people are hoarding them is ridiculous.

    1. paul

      Their cost of living is actually very high as it consumes all of their income and a bump in the road means a trip to the local usurer.
      There was a revealing article in outlook( I think) last year about the people who attend the Tata cancer charities. Most of them had sold their farm smallholdings and were in terrible straits trying to survive in an alien urban environment where every necessity ,clean water for instance, was exploitative monetised.
      I often think indian society is the future, grotesquely unequal, environmentally callous and lawless for the majority.

  13. H. Alexander Ivey

    And further more, a quick review of The Wire link showed that, while 2 out of 5 interviewees thought the action of removing the notes would have a negative impact on the economy-the other 3 were of the ‘let them eat cake, er, open a bank account’ opinion, none of them clearly linked this action to what will almost certainly be a major disruption and destruction of most people’s lives in India. Seemingly absolutely no concern for real people with real lives. No, it was a necessary thing to fight ‘terrorism’ and ‘black money’

  14. H. Alexander Ivey

    And lastly (sorry if this gets me bounced for posting too much, too soon, but I live outside of the US and I have experience with countries where much economic activity is done only in cash) but the Indian economy will not go into barter. Much of the use of these Rs bills is for small services and small items. How are you going to barter for those? “Oh, Mr. Taxi Man, I’ll will do your washing for a week for a ride to my place of work.” Really? Remember, money is NOT used for barter, in any form of that word. People will be force back to the very old style ‘credit’ system, talked about by Michael Hudson, et. al. Credit here being more like “I’ll run a tab and we can settle up at a later date” kind of thing.

  15. Rhondda

    So it’d be about comparable to the demonetizing of $10 and $20 bills in the US. I am surprised there isn’t some sort of pushback from the populace. The quotes all have a sort of “Tut, tut, it looks like rain” quality. If it was my rent and grocery money– or life savings — I’d be hopping mad.

    1. Jerri-Lynn Scofield Post author

      That’s exactly right. So, as a rough analogue, imagine that on Tuesday night, the Obamamometer had made every bill except $1s and $5s non-legal tender. And closed the banks the next day, plus ATMs through Friday. That gives you a rough idea of what people are dealing with. I’m most amazed by how people are more or less muddling through.

      Typically, one holds onto some Rs 100 and the smaller denominations– Rs 10, Rs 20, and Rs 50– for tips, newspapers, buying fruits and vegetables, public transit, and short taxi rides. (Unlike in the US or Europe, you can’t throw such transactions onto a credit card– and remember, many people in India don’t even have bank accounts, let alone credit cards). These types of expenditures are cash-only, so once a person’s stock of that small stuff ran out, there was no easy way of breaking a larger bill down and getting necessary cash for day-to-day operating expenses. (Except to rely on friends, acquaintances, and the Popeye solution– aka, I’ll pay you next Tuesday.)

      People hold their cash in the form of Rs 500 and Rs 1000 notes. And all of a sudden, these notes no longer have any value. One has to swap them for the new notes, and as you might imagine, there are big queues at the places one can do this, as well as concerns whether the stock of new bills will be in the right places at the right times to meet the demand for the new bills (and for multiples of the small denominations that are still legal tender).

      ATMs open again today, but withdrawals are limited to Rs 2000 per transaction (compared to the previous norm of Rs 10,000). I imagine, however, that one will be able to make multiple transactions (subject to fees of course– some of the machines require you to pay Rs250 per withdrawal and that’s much bigger bite out of Rs 2000 than Rs 10,000) I typically seek out machines that don’t take such fees but in the near future, I think the issue is going to be finding machines that have money.

      Banks have waived some of the fees for conducting transactions at branches. I think there are limits on some accounts as to how many of those transactions one can do per month, and there are of course fees attached– but I don’t know details here. But I’ve yet to see whether the banks will eschew those ATM fees. My intuition is no, whether or not the bank wants to do so, just because I think it’d be much more difficult to reprogram ATMs not to demand a fee than it is to tell human tellers not to levy one.

          1. Jerri-Lynn Scofield Post author

            There are many State Bank branches scattered through Kolkata. Huge queues formed at ATMs Friday throughout the city– until the machines ran out of money. People were largely calm and accepting, and the queues orderly– well, as orderly as Indian queues ever are. Interestingly, while there was widespread grumbling at the inconvenience imposed, more or less each person I talked to was supportive of the government’s announced intention to tackle corruption.

            1. Jay

              If you feel its safe, go late at night. Far smaller and less frustrated queues than normal. One beats the sun and noise too.

              Its amazing how many people here are not realising how unfair this move is: making the many suffer because of the few. Just reinforces the latter’s sense of power.

              Anyway, considering you posts links from thewire.in, I thought you maybe be interested in one of their more interesting posts about this demonitisation fiasco – “Decision to Demonetise Currency Shows They Don’t Understand Capitalism: Prabhat Patnaik http://thewire.in/79419/demonitesation-interview-prabhat-patnaik/

      1. cnchal

        . . . So, as a rough analogue, imagine that on Tuesday night, the Obamamometer had made every bill except $1s and $5s non-legal tender. And closed the banks the next day, plus ATMs through Friday.

        Please stop giving Yellen ideas.

  16. H. Alexander Ivey

    —Tried commenting from my mobile, but I’m thinking the President-elect ate them, he seems to be blamed for a lot this week (haha). So I’m trying from my trusty laptop—

    Two thoughts:

    First, Rhondda is too kind, The Wire’s talking heads were more like “let them eat cake, err…, open a bank account”. Not a word about real people with real lives being real disrupted.

    Second, barter, what barter? Money is not barter so ‘barter’ can not replace it. Now the article did not say that bartering does replace money so I’m just being an old fuddy-duddy. But answer me this: how are you going to pay for a taxi ride in New Delhi? “Mr. Taxi Driver, I’ll do your washing for a week for taxi rides to my place of work. Ok?”. If you don’t have money for these small services and small items, then how?

    1. ambrit

      I think that’s one of the ‘knock on’ effects the article mentions. A freezing up of large parts of the daily economic life of the nation. What look to be the big social disruptors in this are the spectres of the banks and big money changers making out like bandits merely swapping out what is already thought of as the peoples money. A more blatant exercise in rent extraction I cannot think of.
      Diwali has just ended for this year. What a surprise gift the government has given everyone! Chaos!

  17. Neil Pyper

    Thanks for the piece. This is a really interesting issue. Cash is much less used, say, in the UK, than even a few years ago, thanks to innovations like contactless payment. Obviously – 2008-crash aside – we have a very well developed banking system. My question is about whether the Indian banking system, especially outside major cities, can handle huge volumes of electronic payments.

    (Anecdotally, I have recently returned to Peru after about 15 years away, and was struck my how widespread card payments have become in quite a short period of time.)

    1. paul

      Roughly 1.5 million unbanked in the UK (rated 9th in the world for financial inclusion). That’s about 3% of adults
      If India leveled with us that would leave around 30 million out of the picture

  18. Sam

    If this sounds like War on Cash, it is. The Finance Minister of India in an interview rationaled that they first helped the Indian farmers and informal economy participants open 25 million bank accounts. Next they gave away free debit cards to get the formerly cash-dependent masses to change behavior to cashless debit cards.

    Another objective is state elections. In India, political parties have no obligation to disclose donors and sources of funds, which means a lot of money is ‘black’ money, or cash, from anonymous donors. After elections, depending on your ability to influence projects, permits, an elected official or bureaucrat can demand from a couple hundred dollars to several million dollars, some of it is deposited in foreign numbered accounts while the balance is doled out in cash.

    Despite banks giving you as high as 6% interest rates for savings accounts, and as high as 10% for long term fixed deposits, many Indian businessmen and traders are simply not used to paying their fair share of taxes. A cash transaction has no record and usually results in discounted prices for the buyers.

    Finally, there are 2 other elephants in the room in the form of terrorism financing (Pakistan circulates counter-feit Indian currency in a bid to destabilize the Indian economy) and real estate transactions (where you may pay as much as 50% of the house price in cash).

    Right now, India is in chaos with a shortage of bank currency notes, banks closing shop before their closing time and ATM’s running out of money. The transition may take several weeks.

    One factor that no one seems to talk about is that Indian banks have over $100billion of non-performing assets (think sub-prime and ripe for default), esp. State Run Banks (government owned) and this cash swap is a good way to get a lot of people to deposit and fund banks for their BASEL III capital adequacy requirements.

    1. Teddy

      So basically it’s a power grab with mass surveillance as an express purpose, with additional ‘benefit’ of forcing people to prop up undercapitalized banks.

      1. nothing but the truth

        you have no idea how bad the tax evasion/laundering situation is in india. lowly officials are regularly caught with hundreds of millions (dollars equivalent)!

        he is right, the current situation places a negative premium on honesty. honest people can no longer afford property in india, because it has all been grabbed by money launderers getting rid of cash.

        he seems to have thrown in the terrorism/counterfeiting thing as an extra to prevent outspoken opposition. But there has been evidence of counterfeits coming in from the regular suspects across the border.

        1. Teddy

          This counterfeiting thing is a smokescreen. US had a problem with high quality “superdollars”, supposed to have come from DPRK – what they did is issue new, more secure bills. In no way counterfeiting excuses forcing people to deposit their cash in bank accounts – in fact if the counterfeiting situation is really that serious, such a measure will probably make it worse, since people will have to get their currency from shady sources, thus making it easier for counterfeiters to dispose of their fakes.

          Again, solution to public servant corruption isn’t mass surveillance, but law enforcement work. Or maybe there are systemic causes that should be addressed, I’m not knowledgeable enough to tell. This line of thinking is what creates out-of-control behemoths like the NSA.

  19. Paul Art

    Black money and the cash economy however is definitely a problem and Jeri-Lynn is good to point this out. In 2004 we bought a plot of land in Bangalore. The owners were Government employees. These people get benefits in the nature of land allotment and also a loan to pay it off with at very subsidized rates. In India there is a saying that goes, ‘If you want to herd cows for a living, make sure you herd cows for the Government’. When I was growing up my mother would constantly tell me, ‘You must finish your studies before 26 years of age because only then can you qualify for a government job’. Anyway, this worthy from whom we bought the land wanted 25% of the purchase price to be given in cash to avoid tax. Properties are routinely registered in the local Registrar’s Office for 20-30% of their actual market value. So the cash economy is a very real problem in India but the way to tackle it is through strict enforcement, not passing gimmicky laws. Take that Registrar’s office I mentioned above, it is Corruption HQ. When you want to buy a property from someone and register it in your name, you basically hire a lawyer and go there. You then follow him around from room to room and every now and then he will turn to you and whisper (can you please go out and wait?) – this means he is going to either grease some palms or he is going to negotiate the bribe. You basically take a small bag filled with cash for this exercise and keep handing it out to the lawyer whenever he asks for the moolah. There was one other hilarious incident when we actually built a house on the land. The sewer line was on the other side of the street and we had to get permission for our builder to cut the road to bring a line to our side. I had to go to the local Bangalore Mahanagara Palike (BMP – City Government Office) to get the paperwork done. The Executive Office there totally refused to sign the papers unless I forked over around $1000. I threatened him with taking his picture on my cell phone and recording him. He nearly fell off his chair laughing uncontrollably. “Sir, he said, please take my photo, I really do not care, whatever we collect here, it does not belong to us but it all goes up Sir, we only get a very little for us”.

    This is what India is. Narender Modi and others visit foreign countries and preen around and talk bombastically but this is what it is on the inside.

    The educated and literate and very well informed Indian middle class goes along with this because there is no option (TINA). In recent times however I see a lot of organizing going on and fighting back via citizens committees and other bodies. But I would not wager money on India suddenly becoming a Superpower in the next 100 years.

    Like I said before, too many people, too many mouths to feed. Law enforcement, rooting out corruption, administering justice via courts, all takes money. When most of your tax revenue goes to pay the bills for importing grain and oil, you do not have much left for anything else.

  20. Larry Y

    So, how good is India’s banking (or alternatives) for the “unbanked”? I’d imagine this would be a huge boon to cell phone based payments system, but don’t know how well that is rolled out – urban vs. rural, etc.

  21. TG

    With respect, I think the big problem in India is that it is so miserably poor.

    People will always try to game the system, and as long as there are people there will be corruption. We can only try to keep it within tolerable limits, and that’s an eternal battle in which we can never declare permanent victory.

    However, when a country is so miserably poor that most people cannot earn a decent living – or perhaps, any living at all – by playing by the rules, corruption and nepotism are inevitable. You cannot stamp it out, that’s impossible.

    I would propose that it’s India’s massive population growth that is to blame (aided by a cheap-labor immigration policy that is flooding the labor market with Bangladeshi refugees). Perhaps you disagree with me and propose another primary cause of Indian poverty – fine. But unless poverty is tackled, corruption WILL be endemic no matter what sort of fiscal tricks the government tries.

    Now you might say that there is a vicious cycle, where corruption creates poverty which creates corruption etc. Perhaps. But the cycle can only be broken with first some measure of prosperity. Lecturing poor people who cannot survive without corruption about the need to behave honorably is both useless and insulting.

    Prediction: this latest move by the Indian government will soon mean nothing, one way or the other.

  22. alpha

    Similar techniques gave been enforced in European countries to counter underground economy and corruption, Italy for instance, with DEVASTATING EFECTS on the economy.
    Since the left wing “justitialist” magistrates and politicians have forced Italians to only pay in cash up to 3000 euros or limits on the withdrawals of cash from ATMs and mandatory registration to the tax office of ckecques isued the Italian economy has COLLAPSED at least by 20% due to these “illuminated” ideas…
    The REALITY is that ALL AND ANY MEASURE TO COMBAT CORRUPTION BY LIMITING CASH WILL DESTROY SIGNIFICANT PARTS OF ANY ECONOMY….and this is especially hard for normal citizens as criminal CAN HAVE MANY MORE WAYS TO CREATE ALTERNATIVE CASH -gold, drugs, foreign curency – than the actual targets of these witch hunts which are normal citizens….

  23. Jay

    Glad to see that fellow Indians read this website too. I thought I was the only one!

    Should we have a NC meetup soon like the ones NC has in the USA?

  24. Tom

    Also considering this is a post about India, can you please add a tag like “India” to it so it will be easier to find India related posts?

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